The story of ‘Trev and Anna’ is relayed and discussed at greaterfool.ca by Garth Turner, 27 Nov 2011, a must read for Vancouverites. Here is the core anecdote:
Trev and Anna paid $1 million for a place near Main Street. Sadly, it was unrenovated, so they must spend $150,000 to make it livable. “We plan to stay here 10 years,” Trev adds, “and we were fortunate enough to put down 50%.
“We’ve set aside an RESP for our kid maxed out to the level the government will contribute. I have a limited partnership investment of $50,000 which is projected to provide us with a 7% return. Our combined income at the moment is 120k per year. The house has a separate suite which will provide us $900 per month income. If times get tough then we can rent a spare bedroom to a student for $700. So, we will have $50k after renovations to invest.
Should we seriously consider selling the house when the renovations are complete, rent for a while and then re-invest? The concern is that we will be house rich. If we are planning on staying there for 10 years does this still apply?”
House value (generously presumed) $1.15M.
Other assets $100K.
Percentage of Networth in RE 153%.
These guys are gambling on ongoing price increases.
They will potentially lose ALL of their equity in the coming crash.
(These houses will very likely sell in the $500K-$550K range again at some point).
The idea of them overextending themselves this much into a ‘livable’ Main Street SFH with tenants in the basement and perhaps one in a bedroom just boggles the mind. – vreaa